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Niehaus Liberty selects individual securities on the basis of its assessment of the prospects for long-term appreciation. Elements such as dividend income, balance sheet strength, free cash flow, reputation of management, and volatility are important, but secondary, considerations. Investments are selected for appreciation potential and because they offer a discount from the appraised business value. The Niehaus Liberty investment approach is a slow and deliberate process. Niehaus Liberty will only purchase each individual security at a price that offers a significant discount, and thus a margin of safety, from the appraised value of the business as defined by Niehaus Liberty. Therefore, new clients should expect to see a period of many weeks, if not months, for their account to become fully invested after inception. Investors should understand that the early phase of Niehaus Liberty's management is normally characterized by substantial cash balances that will be reduced only as rapidly as individual security prices remain available within the price guidelines set by Niehaus Liberty in each respective case.
Accounts may also, from time to time, hold significant levels of cash reserves, or bonds, when Niehaus Liberty is of the opinion that a down-market cycle is probable and that even undervalued securities will suffer in the general downdraft, and/or when Niehaus Liberty cannot locate securities offering acceptable discounts from Niehaus Liberty's appraised business value.
By choosing stocks that Niehaus Liberty believes to be at a discount to appraised value, Niehaus Liberty seeks to create a margin of safety. Over time, as other investors recognize the company's value, this margin is expected to decrease and the stock to appreciate. Securities are generally sold when they reach their fair value as determined by a fundamental appraisal of company-specific information. The time needed for value to be recognized in the stock market may be lengthy - 3 to 5 years or longer. For this reason, Niehaus Liberty generally purchases stocks for the long term. By buying securities at a discount to their appraised value, Niehaus Liberty believes risk may be decreased and potential reward may be increased for the investor who is patient enough to wait for the process to work.
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